Hybrids vs Equities: How Does Risk vs Return Trade-Off Stack-Up?

In this contributed post, Chris Joye, Portfolio Manager at Coolabah Capital and the investment manager of our HBRD fund, analyses the current risk and return trade-offs of ASX shares vs. major bank hybrids. The post illustrates that in current market conditions, hybrid investors are able to obtain attractive income returns coupled with significantly less historical risk when compared to Australian shares.

Yields: Equities versus bank hybrids

The first chart considers the current cash (unfranked) and fully franked dividend yield on the S&P/ASX 200 index versus a range of major bank hybrid yields in both franked and unfranked terms. As the chart illustrates, the bottom line is that you can currently get better cash and franked yields in the hybrid market. This begs the question about relative risk.

Past performance is not an indicator of future performance. You cannot invest directly in an index.

Volatility: Equities versus bank hybrids

The below chart looks at the volatility of the equities market compared to the ASX hybrids index. Since 2012, the annualised volatility of the hybrid market (2% pa) has been about 1/6 the volatility of the Aussie sharemarket (12.2%).

Past performance is not an indicator of future performance. You cannot invest directly in an index.

Editor’s note: A smarter way to invest in hybrids

Hybrid securities have been a popular choice with Australian investors over recent years. Until recently, investing in hybrids directly was the primary method available to investors. Investors are now able to invest in an actively managed portfolio of hybrids via the BetaShares Active Australian Hybrids Fund (managed fund) (ASX Code: HBRD). Managed by the post’s author, HBRD provides investors with a convenient alternative to direct ownership of hybrids by offering access to a professionally managed, diversified portfolio of hybrid securities. Compared to direct hybrid ownership, HBRD offers greater portfolio diversification and risk management, all via a single trade on the ASX.

For more information on HBRD and the benefits of active management for hybrid securities investment, please see here.

Chris’ note was initially published on Livewire on the 11th of April 2018.

2 Comments

Hi Richard,
Not a problem. The yields on the financials index/banks is currently 5.8%/8% gross. However volatility has been substantial relative to Hybrids. To put some numbers to this, average volatility of the Financials index over the past 6 years or so has been ~15%, vs. the average volatility of ~3%.

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